Add-On Acquisitions and Your Company’s Worth

By Generational Equity


“In a capital market environment flush with capital, private equity firms are exhibiting renewed focus on improving the operations of their portfolio companies through a buy and build strategy. As a result, the add-on space has seen a fair amount of growth.” – Axial

Occasionally, we like to highlight a particular deal our team at Generational Equity played a key role in if it could potentially help business owners understand all aspects of the M&A process and improve their company’s worth.

Take for instance the acquisition of our client EMCO Inc. by Motor City Fastener Inc. on February 6, 2017. As a provider of numerous electrical, mechanical and automation products that design and upgrade machinery, EMCO was viewed as an excellent purchase to support Motor City Fasteners distribution of industrial fasteners, personal protective equipment and related items. Seems fairly straightforward, doesn’t it?

In fact, Motor City Fastener had previously been purchased by private equity firm Oakland Standard Co., and this purchase of EMCO was led by Oakland Standard in order to support the growth of their platform company. This is what is referred to as an add-on acquisition, and it has become an increasingly common approach to M&A activity in the past five years.

Here’s the official definition of an add-on acquisition according to Divestopedia:

“An add-on acquisition refers to a company that is added by a private equity firm to one of its platform companies, or by a strategic buyer pursuing a consolidation investment strategy.”

Could Your Business be a Target for an Add-On Acquisition?

With this goal in mind, considering the possibility of an add-on acquisition as part of your business exit strategy could result in a premium return on your most valuable asset. Why is this? Because over the years, private equity firms have realized it is far less risky and potentially far more lucrative to combine a number of smaller, viable companies than succeed with a $1 billion deal.

Therefore, if a prospective buyer believes your business and the people part of it, including you as the owner, would synergize well with a platform company in their portfolio, it could enhance the value of your company in their eyes compared to a buyer that sees your business as a single investment. This is not an iron-clad situation, but it is certainly one to consider.

Plus, this strategy creates opportunities for company owners who are worried their business is too small to attract interest – entrepreneurs that attend our executive conferences are often surprised to learn both of the popularity of add-on acquisitions and that they can be relatively small in size.

It should come as no surprise then that as early as April 2017, 736 add-on deals had been completed worldwide, with 60% of this activity taking place in the U.S. Add-on acquisitions now account for a significant portion of North America’s M&A market activity, and it is important that business owners throughout the nation understand how these deals work, as they could become crucial in their own exit strategy.

This will rely heavily on finding a private equity firm that feels your company would link well to another in their portfolio. This could be due to:

  • Employee experience – your team of staff might have the expertise and understanding to help develop the platform company
  • Geography – you might be firmly established in a location the private equity firm is aiming to expand into
  • Diversification – your company’s processes, equipment or products could help to diversify and evolve the platform company’s operations to increase efficiency, market share and, above all else, business growth

This is just a small sample of why private equity firms could consider your business an ideal target for acquisition in relation to another company already on their books.

If you would like to increase your understanding of add-on acquisitions and how these can play into your exit strategy, you should attend one of our insightful executive conferences. These are completely complimentary and provide a detailed breakdown of the M&A process, from successfully building a buyer ready business to negotiating and structuring the right deal for your company.

It only requires an investment of a few hours of your time, but could be the first step into developing the perfect exit strategy and securing the optimal return on investment for your business. If you want to learn more, feel free to contact us at Generational Equity and a member of our professional team will guide you through the process.